Q&A RE: Proper Financial Statement Presentation Following a 263(a) Study

Does this change of reporting the R&M expense for tax reporting purposes, per IRS statute, require that we conform with the same presentation / treatment for financial statement reporting?

Situation Background

ABC Company engaged Engineered Tax Services to perform a Repairs & Maintenance Study. The R&M Study identified approximately $15K of capitalized assets from 2005 that should have been expensed.

The result of the R&M Study will allow a tax return deduction by filing Form 3115, Application for Change in Accounting Method. Form 3115 will show a Section 481(a) adjustment in the amount of $15K that will deducted on the 2013 Form 1120S.

A question has come up regarding the proper financial statement presentation after an R&M Study has been performed. As a result of the study, we are changing the tax treatment from a capitalized asset to an expense. Is there any guidance that supports the proper GAAP financial statement presentation after an R&M Study has been completed? We no longer have a tax treatment for the assets that were identified in the study. Should we also eliminate the book treatment and present the expense from 2005 identified in the R&M Study as a reduction to Retained Earnings on the GAAP financial statements?

As an alternative, can the asset remain capitalized on the GAAP financial statements while being expensed as a 481(a) adjustment on the tax return?

Answer

The R&M study only addresses tax. Book can and probably will be different, assuming the change for tax is only a tax rule (such as accelerated depreciation) and not for something that has a parallel book rule (Please note that I haven't seen the study and don't know the reason for the change). For only a tax rule, tax only looks to book for the $500/$5,000 de minimis rule.

***The purpose of this post is for informational & discussion purposes only and is not intended to be used as tax advice. Answer provided by Kreig Mitchell, ETS Board Member and Tax Attorney.

Author

Engineered Tax Services

Engineered Tax Services

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